This blog has extensively covered licensing and related disputes between Oracle/NetSuite and its customers. Recently, Tactical Law Group has increasingly received inquiries from dissatisfied Oracle customers concerning the financing of their NetSuite SuiteSuccess ERP deals through the Oracle Credit Corporation ("OCC"), an Oracle subsidiary, and Oracle's practice of assigning such financing agreements to third party lending institutions. As part of their sales pitch, Oracle offers financing for its ERP solutions through OCC, which then turns around and quickly assigns the right to receive payments to a third party. Insulated by onerous and possibly unconscionable language in the financing contract, these assignees often assert that they are due payment on the contract, even when Oracle's proposed ERP solution has been a total failure and has never gone live. Readers of our blog are acquainted with Barrett Business Services, Inc. ("BBSI") and its dispute both with Oracle, and with Key Equipment Finance ("KEF"), which raised such issues. But other lending institutions such as Banc of America Leasing & Capital LLC have aggressively filed lawsuits against multiple Oracle customers who have been damaged by failed NetSuite ERP implementations, as well.
The facts follow a familiar pattern. American company enters into a cloud and professional services agreement with Oracle/NetSuite for its SuiteSuccess ERP product. Oracle promises that their solution can be delivered quickly and can go live within months with only a few minor customizations and at a fixed price. In good faith the customer signs contracts with Oracle, believing the representations. Quickly it becomes apparent that the Oracle team is over their heads and can't make good on its promises without significant price increases through expensive change orders, and with a longer timeline to go live. Often the Oracle team is comprised mostly of consultants or employees located outside of the U.S. resulting in a communication nightmare. The Oracle customer begins to believe that it has been sold a bill of goods by Oracle. When the Oracle/NetSuite customer pushes back demanding that Oracle fix the problems or agree to cancel the contract and provide a refund, Oracle presents them with a Subscription Services Agreement ("SSA"), which the Oracle customer didn't even know existed, as it had not been presented with conspicuous notice by Oracle during pre-contract discussions or contract execution, but was instead in a disguised hyperlink on the Oracle Estimate Form. Oracle then relies on a clause in the SSA, which purports to relieve Oracle of any responsibility for providing a functioning ERP software product. The Oracle customer stops payment on the failed solution, which has never gone live. The next thing they know they receive a notice of default from the assignee of OCC (a separate third party lending company such as Banc of America Leasing or Wells Fargo) threatening to sue on the financing arrangement. If they don't pay, then often they get hit with a lawsuit from the financing company for breach of contract.
In the BBSI case, Oracle and its third-party implementation partners promised to deliver an ERP solution to help BBSI manage its complex operations. Months after the ink was dry, and long past the scheduled launch date, it became clear that there was no ERP solution for BBSI, unless of course it wanted to pay almost $30 million more in changer orders than the original agreement contemplated. Citing Oracle's breach, BBSI halted payment and brought suit in San Francisco Superior Court, for among other things, negligent misrepresentation, fraud, and breach of contract.
KEF soon joined the litigation, claiming that it was due payment under the contract regardless of any claims BBSI had against Oracle. BBSI cross-complained saying that it should not have to pay OCC and its assignee KEF because of Oracle's fraud and failure to perform. KEF demurred, claiming that as a holder in due course under California law "come hell or high water" BBSI would still need to pay. KEF situated this argument under California's Commercial Code sections 9403 and 3305. These laws essentially prevent a debtor from bringing a claim against an assignee that it might have against an assignor except for a couple of very narrow exceptions. In support of its motion, KEF relied on Wells Fargo Bank Minnesota, N.A. v. B.C.B.U., the leading case in this area. 143 Cal.App.4th 493 (2006).
In that case, at the direction of its counterparty, B.C.B.U. pre-signed an equipment lease agreement before negotiations on the agreement had concluded. The counterparty promptly assigned the lease to Wells Fargo, but the original agreement subsequently fell through and was never executed. Two years later, Wells Fargo sued B.C.B.U. to collect on the assigned lease. The court found that "under section 9403 (and 3305), the only defenses against an assignee who takes for value, in good faith, without notice of a property or possessory right to the property in question, and without notice of certain claims and defenses in recoupment, are...infancy, duress, lack of legal capacity, 'illegality of the transaction which, under other law, nullifies the obligation of the obligor,' fraud in the inducement, and discharge in insolvency proceedings." Id. at 504. Thus, even though the original contract was never performed, because Wells Fargo was a "holder in due course" and had no reason to know that there was no underlying performance, its assignment was enforceable.
Crucially, KEF and Wells Fargo relied on the California Commercial Code, but this statutory scheme generally only applies to the sale or lease of physical goods – the lease at issue in Wells Fargo was for office computers. While BBSI seemed to acquiesce to KEF's reliance on the commercial code, there is a growing body of case law indicating that the kinds of ERP solutions that Oracle offers fall outside its purview. In fact, in Kentwool Company v. Netsuite, Inc., the federal court in the Northern District of California found that Netsuite's (an Oracle subsidiary) ERP solution was not subject to the commercial code because "the predominant purpose of the contract [was] the provision of services." 2015 WL 693552. This is important because if companies in this kind of situation are able to maneuver out from under the weight of the commercial code, regular common law defenses like failure of mutual assent and unconscionability are no longer statutorily barred and may become available as against a third-party assignee in order to halt payments on the contract. This could be especially true where the third-party financing institution such as Banc of America Leasing, has brought multiple lawsuits on these OCC assignments' and presumably has knowledge that the customer in each one stopped paying because the system never worked, making it harder to claim a complete lack of knowledge about Oracle's performance failures.
BBSI, KEF, and Oracle eventually settled the dispute on legal turf that was unfavorable to BBSI. While the Commercial Code provides some remedies to a client as against the service provider that are not available at common law, like implied warranty claims, the loss of those claims are probably less painful than the ongoing obligation to pay an assignee for services not rendered, and a failed ERP implementation that never worked.
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